Tracing families' escape from poverty

Jan 10, 2011 by Peter Dizikes
Robert Townsend, the Elizabeth and James Killian Professor of Economics at MIT.

For all the detailed tools developed to study finance in past decades, relatively few scholars have brought those methods to bear on a pressing social question: How do poor people manage their finances?

Now, a long-term study of the poor in small villages in Thailand is shedding light on the issue. Having a sound financial strategy, including a commitment to has a large impact on lifting families out of , the research reveals. Moreover, advances in wealth are linked to highest level of education obtained by a household member, as well as a to try new ventures.

The study, based on a unique set of data collected under the direction of MIT economist Robert M. Townsend, shows that among rural , 43 percent realized significant and lasting gains in net worth over a seven-year period, and that 81 percent of that wealth accumulation was due to savings of income, as opposed to gifts or remittances, that is, contributions the family did not earn.

“There is not a poverty trap in these Thai villages,” says Townsend, the Elizabeth and James Killian Professor of Economics at MIT. “There are strategies people can pursue to increase their relative wealth.”

The findings are summarized in a new working paper, “Wealth Accumulation and Factors Accounting for Success,” written by Townsend and Anan Pawasutipaisit of Thammasat University in Thailand, and slated to be published in the Journal of Econometrics. The conclusions are based on a pioneering survey of household finances in 16 Thai villages that Townsend initiated in 1997. This paper takes monthly data from 1999 through 2006, for 531 households, and represents a unique view into the month-by-month financial lives of rural villagers in a country that has demonstrated substantial economic growth in recent years, yet still has substantial pockets of poverty.

The Thai villagers in the survey tend to be farmers, fishermen, laborers or run small businesses. Households that do get ahead have some generally shared characteristics. The heads of households tend to be younger than in the families that do not increase their worth. Additionally, gains in wealth correlate specifically to the highest level of obtained by a family member, and not the family’s median educational level, as Townsend notes.

“It’s not the average wisdom of household members pulled together,” says Townsend. Rather, he notes, “It’s suggestive that it is the ability or talent of one individual” that can change a family’s entire economic trajectory.

Moreover, the data show financial success to be a persistent feature of certain households, meaning it is not the case that “successful entrepreneurs are those that simply get lucky” due to one good crop or fish harvest, as Townsend and Pawasutipaisit write in the paper. But new ventures are sometimes behind the accrual of wealth. In one survey village, the household with the highest annual rate of return on assets (17 percent) was headed by a corn farmer whose wife insisted that they try raising dairy cows instead, sensing that owning livestock would be more profitable in their area; the idea came in part after a milk cooperative sent workers to educate villagers about cows.

“This work really lifts the veil on the lives of low-income people that had been hidden, largely because we don’t usually collect data with this frequency,” says Jonathan Morduch, a professor of public policy and finance at New York University. “Once you do that, you see that people are not passively accepting their fates. We see a lot of consumption smoothing — people’s incomes are going up and down, but they’re borrowing, saving, insuring with each other and reducing risk in an informal way. People are actively seizing opportunities. That’s exciting and important to know.”

Townsend has also summarized some of his research in a 2010 book, Households as Corporate Firms (Cambridge University Press), written with economist Krislert Samphantharak of the University of California, San Diego. Now, as the survey continues, Townsend and Christopher Woodruff, another at the University of California, San Diego, are trying to further define just what it is that makes some households more entrepreneurial-minded and able to generate a higher return on assets than others. Currently the survey is asking questions about financial literacy and risk-taking tendencies in an attempt to create a more detailed profile of the types of households that escape poverty as a result of trying new businesses.

How do small gains feed a large economy?

In turn, another area of ongoing research for Townsend and his colleagues is the attempt to take the microeconomic data from individual households and villages, and use it to flesh out the macroeconomic analysis of Thailand’s economy as a whole.

“It’s easy to think of Thailand and countries like it as producing GDP [gross domestic product] from the factories which line the highways as you enter Bangkok,” says Townsend, referring to firms like Ford and Nike with large operations in the area. But multinationals and incorporated businesses only account for 20 percent of Thailand’s national income. “We already know that households as firms are a big building block of the national economy,” he adds. “We want to understand the evolution of that as the economy itself gets bigger. Where did the bigger, domestically owned Thai firms come from? Did they grow from some interesting earlier existence?”

The financial activities of people in the more rural areas of Thailand are linked to the larger economic situation in the country in other ways as well. Households in many Thai villages run businesses that do not earn as great a rate of return as, for instance, savings accounts; some of the more financially savvy Thai households put their savings into banks.

“And then that money becomes somebody else’s loan,” says Townsend. “In the United States, people talk about Main Street and Wall Street as if they are separate. But we think it’s really important to understand how these financial institutions and markets are put together, and how that fabric is woven into the national-level economy. That’s a very big part of our ongoing research.”

Some funding for the research was provided by the John Templeton Foundation and by the Bill & Melinda Gates Foundation.


This story is republished courtesy of MIT News (web.mit.edu/newsoffice/), a popular site that covers news about MIT research, innovation and teaching.

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User comments : 4

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ArtflDgr
5 / 5 (1) Jan 10, 2011
My family would have escaped poverty if it was not for the liberals deciding that we who came here last gneration are just as guilty asnd oppressor based as those they label. so when i was inner city, i was a darling, when i got a new address, i awas anathema. would be a researcher with the people i work with excet that they decided to use a racial gender aesthetic as a determinant of authorization to achieve. went to bronz science and had to sotp since they took away the scholarships and programs the way the sba 8a program does that for entrepreneurial adults... for an aesthetically designed future over meritocratic empiricism tested in honest competition.

so rather than move from illiterate refugees, we have been held down for designer purposes, and this man here is just suggesting alternative designs (as if science is some form of social decorators tool).

ArtflDgr
5 / 5 (1) Jan 10, 2011
before someone cros, my family is from iddle seurope, and my wife is from indonesia, and we both have a harder time navigating the designs of social engineers improvements. which is what comes next for the thai after such analysis is done and they then want to improve them, rather than let them be and not be designed and changed to fit their limited ideas.
ryggesogn2
3 / 5 (2) Jan 10, 2011
Imagine that. Saving money improves an economy.
The USA rewards spending and punishes saving.
The USA punishes entrepreneurs and those who work and rewards those who don't work and don't create.
geokstr
1 / 5 (1) Jan 10, 2011
...wealth accumulation was due to savings of income, as opposed to gifts or remittances, that is, contributions the family did not earn.

This can't be. This fake "economist" must be some RethugliNazi BusHitlerite capitalist-roader. Every thinking, sentient being knows, the debate is OVER, that wealth comes from and belongs to the Collective. The tiny bit that doesn't, it's totally, like you, know, stolen from the mouths of little children that are worked to death in 18 hour shifts. Without even unions!

Why, if this subversive idea gets out, the drooling ignorant masses might start to believe that welfare and other freebies do actually trap generations of people into dependency on the government. Who in the hell would vote for us if that happened?

Ha! Got it! We'll just put it out there that Jared Laughner was rumored to have had a friend whose third cousin's ex-wife's maid claimed to have heard of this Robert Townsend.

Whew! That was too close.

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